latest shoe on Venezuela's oil

From: michael a. lebowitz (mlebowit@SFU.CA)
Date: Sun Oct 10 2004 - 17:56:07 EDT

Venezuela Boosts Taxes on Orinoco Deals
Sun Oct 10, 2004 03:31 PM ET

By Pascal Fletcher

CARACAS, Venezuela (Reuters) - Venezuela on Sunday ordered foreign oil 
firms operating in its huge Orinoco heavy crude belt to pay much higher 
taxes in what President Hugo Chavez called a drive to tighten sovereign 
control over petroleum resources.

"This is an act of justice and sovereignty," Chavez, a firebrand left-wing 
nationalist, said in a television and radio broadcast.

He said he was raising the exploitation tax on several multibillion dollar 
oil ventures in the southeast Orinoco belt to 16.6 percent from the current 
level of 0-1 percent, which he criticized as "negligible."

Venezuela, the world's No. 5 oil exporter, had been negotiating with its 
U.S. and European partners in the Orinoco to ensure that future projects 
fell in line with a 2001 Hydrocarbons Law raising existing royalty and tax 

But Sunday's apparently unilateral decision came as a surprise as it had 
been understood that the tax hikes would not affect existing operating 

The move raised questions about the negotiation and legal security of 
future oil and gas investments in Venezuela, which has the world's biggest 
oil reserves outside the Middle East.

"I have decided to use my executive powers to increase the exploitation tax 
(in the Orinoco ventures) .... From today, the tax will be 16.6 percent," 
Chavez said, speaking on his weekly "Hello President" television and radio 

The latest measure affects upgrading projects in the Orinoco region which 
produce about 500,000 barrels per day (bpd) and involve a number of 
international oil companies.

The existing ventures are Hamaca and Cerro Negro with Exxon Mobil Corp., 
Sincor with France's TotalFinaElf and Norway's Statoil and Petrozuata with 

These Orinoco heavy oil projects were signed under preferential terms when 
Venezuela opened its growing oil industry to wider foreign investment in 
the early 1990s.

Chavez, a former paratrooper first elected in 1998, said his government had 
moved to restore genuine national control over state oil firm PDVSA, which 
he said had been "kidnapped" by foreign oil interests over three decades 
until 2002.

In that year, the Venezuelan leader survived a brief coup followed by an 
opposition general strike which badly disrupted oil exports and shipments. 
The government used troops and loyal workers to restore PDVSA'S oil 
operations and fired around 18,000 strikers, including skilled managers and 

Chavez won a referendum on his rule Aug. 15 that confirmed his mandate 
until early 2007.


PDVSA and government officials insist Venezuela's total oil output has 
returned to pre-strike levels of over 3 million bpd. But most industry 
analysts put current production at between 2.6 million and 2.7 million bpd.

Announcing the oil tax increase from the eastern oil port of Puerto La 
Cruz, Chavez said: "Today, we are starting the second phase of the true 
nationalization of PDVSA and of Venezuela's oil, aiming for full petroleum 

He added the raised tax levels for the Orinoco, which holds heavy oil 
reserves estimated at around 235 billion barrels, corrected what he called 
foreign "domination mechanisms."

The heavy crude deposits in the Orinoco belt require a costly upgrading 
process to convert the crude into a lighter synthetic oil. The low-tax 
terms were originally awarded to the foreign firms to offset the higher 
investment involved.

"We consider that the supposed reasons that led to this no longer exist, if 
they ever really existed," Chavez said.

His government is enjoying an oil income windfall, thanks to world oil 
prices soaring above $50 a barrel.

But Chavez, who has strongly supported efforts by the Organization of 
Petroleum Exporting Countries (OPEC) to coordinate oil output strategy, 
said he did not think this price was excessively high.

"Some say it's a very high price putting at risk the economic stability of 
the world .... That's a lie," he said.

 Copyright Reuters 2004. All rights reserved. Any copying, re-publication 
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prior written consent of Reuters.

Michael A. Lebowitz
Professor Emeritus
Economics Department
Simon Fraser University
Burnaby, B.C., Canada V5A 1S6

Currently based in Venezuela. Can be reached at
Residencias Anauco Suites
Departamento 601
Parque Central, Zona Postal 1010, Oficina 1
Caracas, Venezuela
(58-212) 573-4111
fax: (58-212) 573-7724

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